India urged to promote interest-free banking system

JEDDAH: A senior leader of the ruling Congress Party of India has emphasized the need to introduce an interest-free Islamic banking and financial system in the country in order to improve the economic condition of its poor through microfinance and mobilize funds required for the country’s infrastructure projects.

“If we are able to make Islamic finance available it would bring great benefits for our country and people,” said M. M. Hassan, who is also a former state minister of overseas Indians’ affairs.

“The Kerala government intends to make use of Islamic finance for infrastructure and industrial development in the state,” he said.

Hassan said his party, under the leadership of Chief Minister Oomen Chandy, would work for promoting Islamic finance in the state and press on the central government and Reserve Bank to get approval for the purpose. The previous LDF government in the state had taken the initiative to establish an Islamic finance company, with state-owned Kerala State Industrial Development Corp. (KSIDC) contributing 28 percent of the capital.

Hassan also spoke about his Janasree Sustainable Development Mission, a non-banking financial institution, to fund small and medium enterprises (SMEs) of its members.

“We are thinking of making use of Islamic finance for this venture. The availability of interest-free loans would be a big blessing for common people,” he added.

Janasree Microfinance has won approval from the Reserve Bank to operate as non-banking finance firm with a capital of 50 million rupees mobilized from 200,000 shareholders. It will provide microfinance services to small-scale projects including agriculture and industries. “I think our company can operate in accordance with Islamic banking principles,” he added.

The Jeddah Chapter of the Indian Forum for Interest Free Banking (IFIB) recently submitted a memorandum to State Minister for Overseas Indians’ Affairs K. C. Joseph in the presence of Hassan, conveying the feelings of 2 million Indian expatriates working in Saudi Arabia to take a better decision on investment of their hard-earned money in financial institutions of their choice.

The memorandum was presented by V.K. Abdul Aziz, director of Al-Hayat International School, and O. P. K. Kutty, regional financial controller of AA Turki Group, both are members of IFIB. They also presented a copy of the memorandum to Hassan.

The memorandum, addressing Indian Finance Minister Pranab Mukherjee, Reserve Bank of India Governor Subba Rao, Minister for Overseas Indians’ Affairs Vayalar Ravi, and the general manager, State Bank of India, Jeddah Branch, requested that a notification may be published in the Official Gazette of India to include interest-free banking as a form of business and advise the Reserve Bank to issue necessary instructions to all banks to introduce interest-free banking or open interest-free banking windows.

Speaking to Arab News, Kutty said: “Being a pluralistic society India should welcome the interest-free finance system as it would benefit the country’s poor a lot.”

He called for changing Reserve Bank regulations to make Islamic finance available on a wide scale.

“The Islamic financial system can operate as a parallel system in the country,” Kutty said, adding that it would help attract funds from NRIs working in the Gulf.

He urged Indian authorities to take quick steps to make use of these huge funds.

Trying to bring Islamic banking to India

By M D Nalapat

Islamic Banking and Finance Journal

There are more Muslims in India than there are in Pakistan, which is why it is surprising that successive governments have so far done nothing to bring Islamic banking into India. The consequence of such neglect is that millions of observant Muslims are forced to park their savings in dubious entities, because they have been deprived of financial institutions in India that are Sharia-compliant and avoid the payment of interest, because of its ban in the Quran (3:130).

Indeed, the Quran sets forth some very healthy financial principles,such as the avoiding of the giving of finance to unsavoury businesses (5:2), and the showing of compassion to the financially disadvantaged (2;280).

As has been pointed out by several scholars,the prohibition of interest is not unique to Islam, but is also found in Judaism and Christianity ( Psalms 15:5, Nehemiah 5:7).

However, throughout the world, the giving and taking of interest has become widespread Financial experts estimate that more than $50 billion of funds from the Gulf can flow to India, should Islamic banking institutions be set up in the country.

This will generate 2.7 million jobs in the country,both directly and indirectly. At present, almost all the surplus cash of the Gulf countries is parked in London (which, ironically, is the world’s top “Islamic Banking” centre), New York, Zurich and Frankfurt. Naturally, the financial instititions headquartered in these locations would not like to see India emerge as a competitor in the parking of funds from the Gulf.

Though Muslims are a minority in India and are generally less affluent than Hindus, in sheer numbers they make India the second largest Muslim nation in the world. Cumulatively, their investment power is tremendous and represents an untapped resource for Islamic Banking.

They are aware of the strong historical and civilisational ties between India and the Arab world, and are nervous that this may result in funds moving away from them. Indeed, many Arabs are justifiably upset that they have suffered a collective loss of $1.3 trillion because of the numerous malpractices of financial institutions in the US and the EU, and would prefer to place their money in India.

However, thus far, because of the immense influence that financial entities in the US and the EU have over the Reserve Bank of India and the Ministry of Finance, thus far, the policy changes needed to attract such funds have not come about So pervasive is the influence of US and EU funds over India’s financial policymakers that the Reserve Bank of India significantly slowed down economic expansion in India during 2007-2008 by raising interest rates to levels not seen in more than a decade.

Although the RBI justified this as an anti-inflation measure,they themselves know that such painful steps have no impact on price rise,caused as this is by speculation and by policies that favour the middleman over the producer and the consumer.

All that the policy of high interest rates has done was to make several segments in Indian industry less competitive than they were when interest rates were low. The policies followed by the monetary authorities in India have forced several corporates to borrow money from London and other centres in the developed world,at a profit for these centres of 3%.

Small wonder that there is so much pressure on India to prevent the authorities from taking steps that could attract funds from the Gulf. Had the authorities in India encouraged their domestic companies the way policymakers in the US and the EU unfailingly do, India would not have been in today’s situation,when even tiny Taiwan exports double the volume India does Recently, the government of Kerala, a state that has ties with the Gulf that go back for 1600 years, sought to set up an Islamic Banking division in one of their financial institutions.

However, a politician having close links with a section of the Hindu religious leadership has got the Kerala High Court to stay the operationalisation of this move.

India’s courts are famously liberal when it comes to granting stays,with some even lasting for decades. In countries such as the US or the UK, stays are granted only after the court is convinced that there exists a strong prima facie case in favour of the individual making the request. In the case of India, stays by a court are granted far more liberally.

The Kerala High Court order means that the attempt by the state’s Communist rulers to set up an Islamic banking system in a state where 20% of the population are Muslims may be indefinitely delayed. Bankers in Europe and in the US can rest easy, knowing that it may be a long time before the estimated $1.16 trillion dollars parked in so-called “Islamic Banking” institutions in these locations faces competition from India

Although it is true that several policymakers allow themselves to be unduly infuenced by interested parties operating overseas, the fact remains that overall, India’s policymakers are a patriotic group. Indeed, with all their faults, India’s administrators have done a commendable job in ensuring a modicum of stability in the face of frequent political upheavals.

Hence, this columnist is optimistic that it will not be long before India copies the Malaysian model, and brings Islamic banking into the country. Closer economic interaction between India and the Gulf is in the interests of both sides. The GCC countries and India are complementary in their skills and congruent in their interests. The setting up of Islamic banking divisions within the existing banking network in India would ensure a substantial flow of investible funds into the country.

Of course, none of this money would get diverted to industries such as gambling and alchohol, that are barred in Islam. A beginning has been made by the Jamaat-i-Islami Hind,which has set up a committee on Islamic banking under a noted scholar, Mr Abdur Raqeeb. Some influential policymakers within the Congress Party are also active in seeking to overcome the block to Islamic banking that has been artificially created by international interests keen to ensure that India does not take money away from them India is a secular country, and therefore Islamic banking needs to be seen not as a “Muslim” issue, but as one that involves the welfare of each citizen,whether Muslim, Christian, Hindu, Jain, Sikh or Buddhist.

After all, the huge volume of remittances from Indians working in the Gulf benefits the entire country and not simply those belonging to a particular religion.

Islamic banking therefore needs to be viewed less as a religious right than as a secular advantage. Allowing India’s observant Muslims to gain access to domestic funds that are Sharia-compliant would ensure that they avoid getting duped by unregulated and often dubious entities that seek to profit from their faith.

The Islamic world is India’s natural partner, and one way of strengthening such linkages would be through the introduction of Islamic banking in India Indeed, it can be argued that the healthy financial principles mentioned in the Quran were the earliest enunciation of the “mutual fund” concept. Unless mutual gain comes from mutual effort, and unless moral principles are given primacy in decision-making, the world will witness further man-made catastrophes such as the 2008 financial crash.

This was caused entirely by the greed of some 380 individuals, who were the prime movers in the relentless speculation that artificially drove up the prices of commodities such as food grains, copper, steel and oil. Sadly, apart from a handful,not one of the 380 have suffered any legal consequence of their devastating economic attack on humanity.

Indeed,the Obama administration seems as deferential to them as was George W Bush. Small wonder that speculation in commodities is once again rearing its poisonous head, making the price of oil and other essentials rise despite the weakened state of the international economy. Judging by the way in which Barack Obama, Gordon Brown, Angela Merkel and others are obedient to their whims, it looks as though those guilty of causing the distress of hundreds of millions in their insatiable greed for money will once again plunge the world into chaos, and soon.

In such a context, the need to create financial systems grounded on moral values becomes clear. Should Islamic banking entities finally get sanctioned in India, and should they function in the way that is intended, then not only Muslims but Hindus and others will start putting their savings in them. As the sages say, we need to look for good everywhere, so as to reach it everywhere.

Credit: Islamic Banking Information